Dynamic Climate Policy with Both Strategic and Non-strategic Agents: Taxes Versus Quantities
We study a dynamic game where blocs of fossil fuel importers and exporters exercise market power using taxes or quotas. A non-strategic fringe of emerging and developing countries consume and produce fossil fuels. Cumulated emissions from fossil fuel consumption create climate damages. We examine Markov perfect equilibria under the four combinations of trade policies, and compare these to the corresponding static games. Taxes dominate quotas for both the strategic importer and exporter; the fringe is better off under taxes than quotas, because taxes result in lower fuel prices and less consumption by the strategic importer, lowering climate damages.
Karp, Larry, Sauleh Siddiqui, Jon Strand